Delta SkyMiles forges ahead with a revenue-based frequent flyer program

It’s been three years since rumors first began leaking out of Atlanta that Delta was considering modifying their popular SkyMiles frequent flyer program from a “mileage-based” program to a “revenue-based” program. (“Popular?” you might ask, but what else would you call a program with 90 million members?)

Over the three years, the topic leaked from internal communications and front-end employees and was blogged about from countless points of view. Although the topic was news for many, for Delta, this was not a new development.

It was in December 2002 that Delta sent its SkyMiles Medallion members a letter outlining the program’s revised qualifications for earning elite status. The letter stated that beginning January 2003, the program would “... better align loyalty benefits and rewards with the fares customers pay.” Again, this missive was sent to members in 2002. So it has been a long journey for SkyMiles that will culminate on Jan. 1, 2015, when the recently announced changes to the program will begin.

As it turns out, all of those recently who were announcing that a revenue-based program was coming were wrong—well, partially wrong—as you will soon read. While there can be no doubt that the newly announced changes are revenue based (two words that put the fear into many a frequent flyer), there also can be no doubt that those in charge of SkyMiles have spent thousands of hours talking to SkyMiles members, listening to the airline’s leaders and casting an eye on the future of frequent flyer programs.

With this announcement from Delta, they seem to be reinforcing a new standard in the industry. But keep in mind that the new SkyMiles is not the same as the new Southwest Rapid Rewards, which pioneered the move to a true revenue-based program among the larger legacy carriers here in the U.S.

Although the new SkyMiles might not mirror Southwest Rapid Rewards, it does seem oddly familiar (more on that later) and that’s what will make this work for Delta.

Delta is often an early indicator of trends that other airlines throughout the world will adopt two or more years in the future. Delta’s actions, like their refinery purchase, revenue-nuanced elite qualification rules and global acquisitions like that of Virgin Atlantic, are some examples. And let’s not forget that Delta pioneered non-expiring frequent flyer miles.

Sticking with the notion that Delta is indeed an early indicator of trends, doesn’t that make it something of a canary in a coal mine? And that can, of course, be a good thing or a bad thing.

The Basics

It is easy to notice that the announced alterations to the SkyMiles program are much more than simple changes to the mileage earning structure.

The program is also adopting some of the more popular benefits currently offered by other programs such as one-way awards, the introduction of miles plus money options and what the airline says are improvements to the delta.com award booking tools.

Earning by revenue shouldn’t come as a surprise to members given that Delta has been a bit stealthy in pre-introducing this revenue-based wrinkle by adding a revenue requirement to qualify for their elite status Medallion program.

At first glance, one of the changes to the program is the complication of a simple process—that of award redemption. When Southwest introduced the new Rapid Rewards program, they introduced not only a spend-based accrual model for earning points, but also a cost-based redemption model.

Delta is not going the straight route that Southwest adopted but instead has adopted a familiar enhanced tier structure for award redemption. Familiar? Yes, the new Delta award flight structure almost exactly replicates award tiers that travelers have used for years when spending points in major hotel loyalty programs. In Delta’s version, SkyMiles now has a five-tier award flight structure, up from their current three-tier structure for domestic flight awards.

The Airline

With these recent announcements, Delta becomes the first U.S. global airline to transition its frequent flyer program from accruing redeemable miles based on the distance the customer flies to one where a customer accrues redeemable miles based on the price of the ticket purchased—but there’s more to this than that.

Delta has for some time now clearly established itself as a leader and was recently named 2014 Airline of the Year by Air Transport World magazine—the first time in a decade that a North American carrier has earned the distinction.

By way of measurement, United last won this award in 1974. And while former American Airlines CEO Bob Crandall hasn’t been all that complimentary regarding Delta’s decision to purchase an oil refinery in order to try to control fuel prices, their decision to purchase a commanding share of Virgin Atlantic shows some promise. The move reiterates their original Atlantic Excellence alliance, which lasted less than two years with partners Swissair, Sabena and Austrian Airlines, and holds out much more promise than just their membership in the SkyTeam alliance.

Chances are these decisions, and the ability to make work what others haven’t been able to make work, is why CEO Richard Anderson and the Coca-Cola-loving team in Atlanta are on a roll. Certainly their one-year trailing stock price performance leads all the major airlines. So, it seems that this decision fits into the path that Delta has chosen for the airline and its customers.

The Crossover

What we were surprised at in this announcement is Delta’s just-short-of-cost-based redemption decision. Southwest Rapid Rewards successfully pulled it off as has JetBlue and others. Was it too much to do all at once? Or was the feedback strong enough from focus groups sending a clear message that members of these programs equate value with the ability to earn at lower rates and redeem at higher values such as the path that most mileage runners employ? While we don’t know the answer, we do know that the new SkyMiles program looks like a “crossover”—it has crossed over into a model that has long worked successfully for hotel programs.

As we all know, most hotel programs are based on members earning points according to the amount they spend and then employ a tier structure for redeeming points for hotel stays (generally called categories for hotel award stays). This loyalty structure has been in place since the dawn of hotel loyalty programs without much if any discussion, feedback and more importantly—complaint. And most importantly, it seems to work. Members don’t complain much about award choices, and if they do, it is when hotel categories change, which similarly will give room to complaints about Delta’s new five-tier award chart.

It seems clear that such an adoption parallels that of hotels in which more expensive hotels on an average daily rate are positioned in the higher tiers for the number of points required. In this case, SkyMiles award tickets will align themselves more closely to the price of air travel, which is how yield management has operated award availability for a number of years now.

But one of the reasons why we are surprised by this particular approach (tiered-structure on back side of revenue structure) is that Delta has long had the ability and infrastructure to convert their program to true revenue-based redemption based on their Pay With Miles option which is currently exclusive to Delta SkyMiles credit card members.

We imagine this is a bit like the tail wagging the dog … the tail in this case being hotel loyalty programs wagging their brethren, airline loyalty programs.

The Earn

The big alteration to the new SkyMiles program is how members will earn into the program beginning Jan. 1, 2015. Earning miles will be based upon five new levels of earn, based loosely on your level of membership in SkyMiles with more bonus and earning power given to the most valuable members—the Medallion elite status members. (See related chart.)

General members earn five miles per dollar spent. This number is increased to seven miles per dollar spent when purchasing a Delta Air Lines ticket with a Delta SkyMiles American Express card.

Moving up to the top of the Medallion ladder, Diamond Medallion members start earning at 11 miles per dollar spent and that increases to 13 miles per dollar spent when using the Delta SkyMiles American Express credit card. (All members earn two additional miles per dollar spent when using the Delta SkyMiles Credit Card by American Express.)

This earning ratio includes the base fare and any carrier imposed surcharges but not taxes and other items that are not Delta imposed such as all government excise taxes, segment fees, September 11th Security Fee and airport passenger facility charges.

For tickets not bought directly from Delta or on other carriers, members will earn a percentage of miles flown based on the fare class. Until this new earning structure is fully transparent and into effect in 2015, it remains a bit of the unknown. We should point out that Delta has some history in awarding a percentage of miles flown based on fare class. In 2012, changes were introduced regarding “unpublished” fares whereby coach fares earn only 50 percent mileage credit, and the lowest coach fares earn 25 percent mileage credit.

The new SkyMiles earn ratio is richer than that of Southwest. A-List members in Rapid Rewards earn a 25 percent bonus from the base fare, while Delta’s Gold Medallion-level members will earn a 60 percent bonus from the base fare. And Rapid Rewards A-List Preferred members earn a 100 percent bonus and Diamond Medallion-level members will earn a 120 percent bonus (not including any relevant credit card bonuses for each).

JetBlue TrueBlue Mosaic elite-level members earn a 100 percent bonus from the base fare. JetBlue’s offer is rich, but Delta’s Diamond Medallion will still rule at a 120 percent bonus. The other spend-based accrual program, Virgin America, offers five points per dollar spent on fares and their Elevate Silver elite earns a 25 percent bonus (compare this to Delta’s Silver Medallion which earns a 40 percent bonus) and Elevate Gold earns 100 percent bonus. So no matter how you look at it, Delta SkyMiles’ top tier members will earn the highest bonus rate among these three other programs.

The Burn

The addition of one-way flight awards will surely up the redemption patterns and availability of awards for those flyers who know how to manage their frequent flyer accounts. The one-way tickets will be priced at half of the roundtrip ticket redemption amount, starting at 12,500 miles within the U.S. and Canada, excluding Hawaii. Customers will also be able to redeem new Miles + Cash awards through delta.com and Delta reservations. (Full details on the Miles + Cash awards have not been announced.)

With the new five tiers of redemption, and perhaps some dynamics as to how availability will float within the five tiers (let’s remember that their own revenue flights float within fare buckets), Delta’s boast is that these changes will improve overall availability at the lowest award levels, i.e. the 25,000 miles domestic roundtrip. We don’t have enough information yet to know how this change will affect premium class awards or alliance awards. We did notice that Delta is continuing with its policy of last seat availability … albeit at a premium. So the new topic will not be if you can use your miles for an award ticket, but rather can you afford to spend the miles you’ll need.

The new redemption charts will be updated online the last quarter of this year and will be effective for new bookings beginning Jan. 1, 2015. Delta says the new redemption structure will align more closely to the price of air travel based on origin and destination, date of travel, the aircraft serving the route and passenger demand.

The Bottom Line

This move by Delta shows why the airline has assumed a leadership role in the industry and demonstrates they are not afraid of taking a risk—and will make the necessary decisions and actions based on what’s best for the airline. While the ground they are covering here is novel for a global airline the size of Delta, we believe that in the next five years, we’ll look back and point to this decision by Delta as a course correction for the global frequent flyer industry.

We can’t help but think it will have some affect on partners and the overall direction of the SkyTeam alliance. We can’t help but think it will influence the direction of other U.S. global carriers such as American and United. We can’t help but think that from now until Jan. 1, 2015, this topic will command the attention of social media among those channels preferred by members of SkyMiles.

We believe that Delta has chosen a very conservative and responsible approach to their 33-year old frequent flyer program, respecting their current members, while transforming the industry to be relevant for the next 33 years.

Unlike the changes to the Southwest Rapid Rewards program, which is basically a stand-alone proposition, this move by Delta has another interesting possible consequence. What does this mean to the airline’s participation in a global alliance? While it’s true that Air New Zealand’s Airpoints revenue-based frequent flyer program has had no impact to their status as a member of the Star Alliance or resulted in changes to partner airline programs, Delta is in a much different position as one of the main cornerstones of SkyTeam.

One could argue that it would influence SkyTeam since the focus on the SkyMiles changes are on accrual rather than redemption. And looking at the rest of the world, we see essentially five other airlines we believe will be influenced by this change at a global alliance level. Mark down Lufthansa Miles & More, KLM / Air France Flying Blue, Qantas Frequent Flyer and Cathay Pacific Asia Miles as programs likely interested in how these changes by Delta as a leading global airline will play out when they have discussions about their frequent flyer programs with their own airline leadership.

This decision by Delta wasn’t made just at the loyalty program level within Delta, it had to reach far and wide within the organization and certainly had to pass muster with an interested Board of Directors.

Furthermore, we believe that this move by SkyMiles will greatly increase any existing movement by both American Airlines and United Airlines in the same direction.

Here’s why. We strongly believe that US Airways was well along a similar path of updating their existing Dividend Miles program given the type of airline that Doug Parker was running, not to mention the close proximity to their main competition—Southwest Rapid Rewards. So we see Doug Parker championing this at American. And while it may be that American will not always make every change that the rest of the industry adopts (there is plenty of proof of that already), this is one of those once-in-a-lifetime of a loyalty program changes that simply cannot be ignored. Would anyone at Amon Carter Boulevard want to suggest that they would increase market share should they not join in with SkyMiles and perhaps United with similar changes?

United is not the wild card here. It wasn’t long after SkyMiles began requiring U.S. members of the program to spend a certain amount to earn elite status that United introduced a similar requirement for their elite status program. Point being that if United did not think this was a move in the right direction for the industry, they surely would not have adopted the change so quickly.
And back to speaking about American Airlines, could it be that they truly wish to fly to the beat of their own drum? It is more likely that with the direction and leadership of that airline so much in the news over the last two years, those in charge will feel it is prudent for them to get the future of the airline decided upon first before mapping out these types of strategic plans for AAdvantage.

American, more so than anyone else in the industry right now, has the ability and timing to make this change to a revenue-based program more natural than others because of the merger with US Airways. But timing is critical and American would surely not subject the members of AAdvantage to a double whammy—the merger of AAdvantage and Dividend Miles—and then subject that same membership base to another drastic change within a period of five years.

Much of the conversation at Delta that will occur in the days and weeks ahead will be centered around the concept of “alienation” of the membership base, especially among Medallion members.

But really, with United having already started to adopt some spend-based practices within their program and the future of AAdvantage still unknown with the merger of US Airways, where would any frequent flyer feel comfortable running to? And besides, as we clearly pointed out, the overall look and feel of the new SkyMiles does seem oddly familiar—somewhat a hotel loyalty program with wings.

Looking at some of the other news coming from Delta SkyMiles, while delta.com has yet to earn the coveted title of dot.bomb, their online tools have lagged behind some of the recent online improvements made by other travel loyalty programs, so the announcement that an improvement on this product is most welcome.

Furthermore, if we could point to a single item that likely created the discussion in Atlanta that led to these changes it would be award redemption, or the lack of award redemption. While statistics of their redemptions point toward rather robust activity—more than 11 million award redemptions in 2013, they still were saddled with the “SkyPesos” moniker, owning more to the fact that no frequent flyer program is universally loved in a social media universe where someone is always complaining: #skypesos #skymilesfail.

And how might these changes play on Main Street? Time will tell. The Delta brand is currently at its highest level ever, and in the 2014 Brand Keys Customer Loyalty Engagement Index for emotional loyalty and engagement, Delta ranked third, just behind JetBlue and Southwest, but well ahead of American and United.

One of the truly ironic things about this change is that it could easily be seen as being motivated by money. But Delta just recently reported $506 million in earned profit sharing for its employees—the highest in company history. So it doesn’t appear to be related just to money. Good management and understanding the future seems to be why Delta earned Airline of the Year accolades.

Yes, it’s true that Delta now rewards customers paying higher fares with extra miles and penalizes, it seems, members buying discounted tickets by giving them fewer miles. But isn’t it also true that most if not all road warriors have lived in this exact same world with hotel and credit card programs and it never seemed out of balance with them?

If our assumption is that SkyMiles is the canary in the coal mine, as frequent flyers, we’ll just have to get used to the fact is that it is their world and we’re all just flying around in it.